Abstract

In new venture capitalization processes, Initial Public Offerings (IPOs) provide a significant source of financial capital for high growth ventures while simultaneously offering exit liquidity for early-stage investors (Daily, Certo, Dalton, & Roengpitya, 2003). However, the pervasiveness of underpricing across markets around the world – reflected in the average difference between the offer price and the closing price on the first day of trading of 18% -- results in many ventures leaving substantial amounts of money on the table for others to appropriate (Ritter & Welsh, 2002). In this study, building upon the resource-based bargaining literature in resource-based theory (Coff, 1997; Coff, 1999; Townsend & Busenitz, 2008), we explore the extent to which the ability of issuers (underwriters) to negotiate a higher (lower) offer price is derived from the relative strength of the issuer’s resource endowment relative to the underwriter (cf., Lippman & Rumelt, 2003). Our central arguments hinge on the premise that issuers with stronger resource endowments relative to their underwriters will be able to negotiate higher offer prices and will tolerate less underpricing, thereby capturing a greater proportion of the IPO proceeds.

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